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Why gold will continue to shine despite hitting record highs

Prices of the precious metal have soared three times in past 9 years, and bullion experts expect the prices to hit R2 lakh/10 grams in the next 7 to 12 years

Screenshot 2024 05 21 090755MUMBAI: Gold has been and still is the ever-shining and the most trusted metal that women love to own and adorn from time immemorial. And the lure for the yellow metal continues its northward-ho despite prices creating new peaks every other day—having scaled past to a record $2,434 an ounce late April and closing at $2,419.80 this Saturday, up over $34 an ounce on a single day. That means the metal has rallied over 40% from the October 2022 trough forced by the Russian invasion of Ukraine in the February of that year.

In fact, gold has long been the most preferred choice for parking wealth in our country, long before stocks, mutual funds and other financial instruments became more popular investment options as this is the most liquid safe haven asset, apart from providing a hedge against inflation or any kind of financial uncertainties. Over the years, the country has also moved away from physically owning gold in the form of jewellery and coins or bars into dematerialised forms such as sovereign gold bonds, digital gold, and gold exchange traded funds now, all at a time when the prices have been heading north.

What’s driving this demand

It can be noted that gold prices have risen sharply— in the past 2 months alone, gold gained from R60,373/10 grams or R6037/g on April 19, 2023 to R 75,550/10 grams or R7,555/g on May 19, 2024. And the gains of this most popular household asset, is three times in the past nine years alone. Can this do an encore sometime this year or next? The industry is not saying this is impossible as they say the metal can triple again and cross the R2-lakh mark over the next few years.

According to the data from the India Bullion & Jewellers Association, it took a little more than nine years for gold to nearly triple and reach the current level–the price was R 24,740/10 grams in 2015. Prior to this, the price tripled in more than nine years, from R8,250 in 2006. But before 2006, it took almost 19 years for gold to triple from R2,570/10 g in 1987. Before this cycle, the tripling time was nearly eight years and six years.

And a tripling from the current level can take the glitter go beyond the R2 lakh/10 gram or R20,000/g! Historical data show that major global events such as geopolitical tensions and economic crises, can significantly influence gold prices. And given the repeat cycle of global financial crises in the past two decades—five-seven years between two meltdowns–or the recurring border tension between given the number of megalomaniac leaders the world has aplenty or the West Asians’ proclivity to flare up every now and then, there is no gainsaying this possibility at all.

In the past four years alone, according to the India Bullion & Jewellers Association data, gold has shown how the falling rupee along with geopolitical tension and the Covid pandemic boosted the prices– a spurt from R40,000 to R75,550, which is full 80% gain!

Citing the past decadal trend, Jateen Trivedi of LKP Securities sees the metal hitting the R20,000/g or R2 lakh/10 grams mark within the next seven to 12 years. Other analysts peg their price rally hopes on the rising changes of geopolitical tension escalating between Iran and Israel and between China and Taiwan. Gold prices are known to rise more when there is a major conflict in any corner of the world or when there is some uncertainty.

But the biggest gold-bulls out there are none other than the leading central banks of the world. According to many global brokerage reports, which see the metal trading at $2700/ounce by December 2024, at least 30% of the price rise this year is attributed to them snapping up the metal, even though gold reserves are no longer the gold standard for central banks.

And as of February 2024, the US had the highest gold holding as the reserves with 8,133.46 tonnes which is 71.3%of the Federal Reserves’ currency chest, Germany (3,352.65 t/70.6), Italy (2,451.84/67.6), China (2,262.5/4.6), and India (822.1/8.9 of which 19 tonne were added in the first quarter of 2024 alone).

Despite prices hitting the rooftop almost every week, according to the World Gold Council, domestic gold demand rose 8% in the first quarter of 2024 to 136.6 tonne. This was supported by a robust economic backdrop and was led by the RBI which bought 19 tonne in Q1 alone as against 16 tonne purchase in the whole of 2023, according to the WGC.

Gold acts as a safeguard and hedge against inflation, which helps boost confidence in a nation’s economy or in confidence of an individual to meet personal emergencies given its instant liquidity. Because gold has long been viewed as one of the best stores of value, though no longer used as a means to back national currencies.

During the March quarter, the country saw a 20% in gold demand in value, totalling R 75,470 crore on an annualised basis. The total domestic gold demand, including both jewellery and investment, rose to 136.6 tonne in Q1, up from 126.3 tonne a year ago. Gold jewellery demand stood at 95 tonne, up 4% due to high demand from rural areas, say WGC.

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